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Stephen M. Mills, CIMA® Managing Partner

PIM Portfolio Manager

Brad Bays, CIMA®

Partner

PIM Portfolio Manager



Highlights:

  • The U.S. economy has shown resiliency in the face of a global pandemic.
  • The U.S. Federal Reserve indicated in its December meeting it would accelerate the tightening process of its’ monetary policy.
  • Stocks surged despite the economic headwinds of the coronavirus pandemic and the change in Fed policy.
  • We remain optimistic for the prospects for the U.S. economy and the stock market for 2022.


Introduction

As we began 2021, we were still battling a global pandemic that has claimed the lives of millions of people, Covid-19 vaccines were in the early stages of being administered, the U.S. economy was recovering from the pandemic induced recession, and we were adjusting to a new presidential administration. Although the development of vaccines in late 2020 raised optimism for 2021, the future was still very uncertain. During the summer, a highly contagious variant dubbed Delta, emerged causing yet another surge of Covid-19 cases and slowed economic growth. Despite all of this, 2021 ended up being a good year for investors.

As we begin a new year, things have certainly improved but we are still not quite out of the woods. The immergence of another Covid-19 variant labeled Omicron, is another reminder that the virus is still alive and well. Yet we remain optimistic that there is in fact light at the end of the tunnel. We invite you to read on to find out why we remain optimistic about economic growth and further gains in risk assets.


U.S. Economy

Despite the persistence of the global pandemic, we believe the U.S. economy remains healthy and vibrant. After a temporary slowing of economic growth from a surge in coronavirus cases in late summer of 2021, the economy resumed its recovery in the fourth quarter. For the entire year, Wells Fargo Investment Institute is estimating GDP (Gross Domestic Product) will increase 4.9% for the U.S. economy.1 In our view, this strong GDP growth rate was fueled by both consumer and business spending that surged from pent-up demand for goods and services after the 2020 pandemic induced collapse of demand. Consumers in particular were ready to come out of their virtual economic hibernation and start reengaging in normal activities like traveling, going to restaurants, movies, sport events and other forms of entertainment they were deprived of in 2020. We believe had it not been for the coronavirus case surge from the Delta variant in late summer, economic growth would have been even stronger in the fourth quarter and for the year as a whole.

Coming into 2022, the economic set up for the U.S. economy looks very good in our view. Although the most recent coronavirus case surge from Omicron variant may slowdown economic growth over the next couple of months, we feel as we move into early spring, the U.S. economy will begin hitting on all eight cylinders again.

Our optimism is based on several factors. First, we believe the pandemic is in the later stages of its progression and will begin to slowly burn itself out sometime in 2022. We are not epidemiologists by any means but we have noted that a number of health experts and scientists believe the continued rise in vaccinations as well as immunity gained from people contracting the virus will allow us to reach “herd immunity” sometime this year. One notable expert on the pandemic suggested recently that in his analysis, 80% of Americans may have some level of immunity either through vaccination or from having contracted the virus. Currently, about 62% of Americans are “fully vaccinated” according to Johns Hopkins Coronavirus Resource Center as the date of this letter.2

As far as the economic impact of the new Omicron coronavirus variant, like the Delta variant, we don’t believe it will cause significant damage to the U.S economy the way the initial onset of the virus did in 2020. The recent case surge we are currently experiencing may cause a temporary slowing of economic activity and hurt GDP growth for the first quarter of 2022. However, we feel there is no appetite for widespread lockdown measures in the U.S. Recently, the CDC (Centers for Disease Control) relaxed their recommendation on how long infected people who are asymptomatic should isolate, reducing the timeframe from 10 to 5 days which should help businesses deal with rising Covid cases in their employee populations.3 In addition, as scientists and health officials learn more about the coronavirus, we are finding better ways to deal with the health impact of the coronavirus. In the fourth quarter of 2021, two major pharmaceutical companies announced the development of two oral anti-viral medications that will help combat the disease once contracted and reduce the chances of several illness or death.4 One of these anti-viral pills has received emergency use authorization from the FDA in late December.5 There is no doubt in our minds that the coronavirus is not going away anytime soon but we are learning how to deal with it and still engage in normal activities.

Second, we believe 2022 will be another strong year for business capital investment (Capex). Capex is funds used by companies to acquire, upgrade and maintain physical assets such as property, plants, buildings, technology and equipment.6 According to S&P Global Ratings, corporate capex will show an increase of about 13% for 2021, the biggest surge since 2007.7

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The chart illustrates how corporate sales growth goes hand in hand with capital expenditures. Capex improves productivity which typically translates into more sales and higher profits. Although capex spending may slow somewhat in 2022, we believe companies will continue to invest in their businesses in order to upgrade and expand productive capacity. We see this long-term investment in our economy helping to drive future U.S. GDP growth for many quarters.

Third, we believe the U.S. consumer is poised to boost spending in 2022. As a whole, U.S. consumers are in great financial shape having paid down debt and increased savings over past couple of years. As a result, total household net worth has reached an all-time high of $145 trillion, according to a Federal Reserve Q3 Funds report.8 As indicated by the chart sourced from the Federal Reserve Financial Accounts of the United States, this represents a 24% increase in household net worth from $117 trillion at the end of 4Q 2019.8 We feel this is remarkable considering the economic

damage wrought by the pandemic. It shows the resiliency of the U.S. consumer and ability to weather economic storms. It also shows that consumers are in good a financial position to boost future spending which bodes well for economic growth since consumer spending accounts for approximately two- thirds of U.S. GDP.

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Fourth, we see the December 15 Fed announcement to accelerate the tapering of its bond purchases (Quantitative Easing – QE) and possibly begin raising interest rates in 2022 instead of 2023 as a positive for the U.S economy.9 It is true that the acceleration of the Fed’s monetary tightening could possibly slow economic growth. However, from our observation of how Chairman Jerome Powel and the other members of the Federal Open Market Committee (FOMC) have operated over the past few years, we believe the committee’s actions will be slow and measured in its effort to adjust monetary policy so as not to disrupt the economy or cause a major correction in stock prices. Essentially, we view the FOMC’s potential monetary actions in 2022 as returning monetary policy to pre-pandemic levels which was no QE and a Fed funds rate range of 1.5% to 2.0% compared to the current range of 0% to .25%.10 That rate adjustment would mean about six to eight rate hikes of .25% which we think will take the Fed at least 12-18 months to implement. We believe that will still leave us with very favorable monetary environment for the U.S. economy and financial markets for 2022.


Equities

Despite the continued bad news about coronavirus variants and surges in case counts, investors enjoyed a third straight year of strong returns from the U.S. stock market as the broad-based S&P 500 Index posted a 28.7% total return for 2021.11 The narrower Dow Jones Industrial Average made up of only 30 stocks, gained 18.7% for the year.11 The market gains were driven by robust corporate revenue and earnings growth as the U.S. economy continued its recovery from the 2020 economic downturn. The third quarter 2021 earnings season marked the sixth straight quarter that corporate earnings beat consensus expectations, something that has never happened before.12 It appears to us that businesses as well as consumers have largely adapted to the pandemic and the economy is well on the way to fully recovering.

In our view, one word best describes the stock market this year, resilient. The market has been climbing the proverbial “wall of worry” since the beginning stages of the pandemic in March 2020. After suffering a sharp downturn from mid-February to late March 2020 during which the S&P 500 Index (S&P) fell 35%, stocks have been in a persistent bull market with the S&P rising over 100% as of the date of this letter.11

The stock market had a lot of bad news thrown at it over the past two years yet has still managed to continue making record highs.11 Investors have dealt with several coronavirus case surges, a highly contentious presidential election, supply chain problems, and a major spike in inflation. The latest apparent bad news as noted above, came from the Fed’s policy shift to accelerate the reduction of bond purchases and possibly begin raising interest rates in 2022. This news would have normally sent shock waves through the financial markets and caused a significant decline in stock prices. However, the stock market actually closed up on the day of the Fed’s announcement. It appears to us investors are looking at these recent negative developments as a glass half full scenario. For instance, although Fed policy is technically “tightening’ the monetary environment which is typically bad for the economy and the stock market, many investors appear to believe it is a positive move because the economy no longer needs the extraordinary monetary stimulus it put in place to fight the economic impact of the coronavirus pandemic. In essence, investors seem to be looking at it as a vote of confidence on the part of the Fed in the economy.

Also, recent inflation data was cause for concern among investors. The Fed’s more aggressive approach to returning monetary policy back to pre-pandemic levels could help combat the recent spike in the inflation data. Inflation has been running hot this year as indicated by CPI (Consumer Price Index) data released in December by the U.S. Bureau of

Labor Statistics (BLS) showing an increase of 6.8% for the 12 months ending November 30.13 As you can see from the chart provided by the BLS, the 12- month percentage change is at the highest level in 20 years.

According to the BLS data, the October and November CPI increase showed an even higher annualized rate of 10.2%. We believe the Fed actions along with an improvement in supply chains problems could lead to a deceleration in inflation by the second half of 2022.

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Source: https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-metro-area.htm

In the meantime, we see rising inflation as positive for stocks. Many businesses are able to increase the cost of their goods or services as inflation rises. This “pricing power,” as it is often referred to, can allow nominal corporate earnings to rise. A study done by Yale University’s Robert Shiller which looked at data going back to 1871, showed the S&P 500’s nominal earnings per share grew faster on average when inflation was higher.14 We feel the key driver for stock prices over the past two years has been corporate earnings growth. Although the short economic downturn in the summer of 2020 depressed corporate earnings for the year, earnings rebounded strongly beginning in the fourth quarter of 2020. Wells Fargo Investment Institute (WFII) is forecasting earnings for the S&P 500 to come in at $209 for 2021.1 For perspective, the S&P posted earnings of $163 for 2019.15 That’s a 22% increase in earnings despite the global pandemic. WFII is projecting S&P 500 earnings will rise another 12.4% in 2022 to $235.1 We believe the higher levels of inflation could help boost corporate earnings even higher.

We see this earnings growth, coupled with a favorable monetary environment, propelling the stock market higher in 2022. We believe, however, that market volatility will be high and there will be corrections during the year. Over the past several months, both the Dow and the S&P have remained above key technical support levels even though we experienced several 2-3% pullbacks in the S&P 500 and a near 5% correction in September.11 Each of these corrections led to a rally back to the new highs.11 We believe as long as these support levels hold, the upward trend that has been in place since March 2020 remains intact. However, we caution that the major averages, particularly the

S&P 500, are due for a larger correction. We think it is possible we could see as much as a 10-15% decline in 2022 in the S&P 500 Index. We are particularly concerned about such a correction in the first half of the year as potential Fed rate hikes and the Congressional elections in November begin to weigh on investor sentiment. We feel any meaningful pullback in stocks will be an opportunity for investors to put idle cash to work in selected stocks and market sectors.

There are some concerns among investors that equity valuations are too high, especially for the S&P 500 Index. There are many factors that need to be considered when assessing whether stocks are under or overvalued.

In our view, the primary factors are earnings, interest rates, and projected earnings growth rates. Currently, the S&P 500 Index is priced at about 23 times estimated 2021 earnings and about 20.5 times projected earnings for the coming year using Wells Fargo Investment Institute earnings forecast.1 Those levels are indeed high when compared to the long-term historical average going back to 1935 of 16 times earnings. Some have even suggested that the stock market has not been this overvalued since the dot.com bubble in the late 90s when at the end of 1999, the S&P 500 Index traded at over 30 times earnings.16 But there was a big difference in the level of interest rates at the time verses today. In early 2020, the 10- year Treasury note yield was over 6% as you can see in the chart compared to a 10-year T-note yield of around 1.5% today. We would argue that today stocks are actually undervalued given the current level of interest rates and growth prospects for corporate earnings.


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In our view, the stock market has a lot more fuel in the tank. There is still a lot of cash on the sidelines looking for an opportunity to invest in stocks. Goldman Sachs reported recently that cash in money market funds is near $4.7 trillion as of mid-December 2021.17 Annual yields on most high-quality money market funds are currently less than .1%. With inflation running over 6%, investors in cash are losing a lot of purchasing power. Goldman sees big investors moving out of money funds and into stocks in 2022.17  This reallocation could fuel the next leg of the bull market.


Fixed Income

Unlike 2020 when most investors enjoyed positive returns for high quality fixed income investments, 2021 was a mixed year for fixed income instruments. The major high quality corporate and government bond indices showed small losses for the year. The U.S. Aggregate Bond Index, which is a measure of the performance of high-grade corporate bonds, recorded a loss of 1.3% for 2021.18 The U.S. Gov/Credit Bond Index which is a mixture of U.S. Government bonds and high-grade corporate bonds lost 1.4%.18 However, tax free municipal bonds were able to record a positive return of 1.3%, as measured by the Bloomberg Barclays Muni Bond Index.18 In our Outlook and Strategy letter at the beginning of 2021, we stated that we believed the risk-reward for owning longer term fixed income investments was not very favorable going forward. Despite this, we stated in that letter that high-quality fixed income investments in balanced portfolios would serve as an anchor in stormy seas if things got rough in the stock market. Currently, we view fixed income in the same way. Although we don’t anticipate fixed income will contribute much return in 2022, we feel it will help reduce downside volatility when the stock market suffers corrections.

We continue to recommend keeping bond maturities under 10 years with an emphasis on high-grade corporate, mortgage and municipal bonds. We view tax-free municipal bonds as attractive for those investors in higher income tax brackets particularly considering the possibility of higher tax rates for high income individuals in 2022. We see moderate increases interest rates across the yield curve in response to more persistent inflation data and anticipation of Fed rate hikes in 2022 and 2023. Conceivably, we could see the 10-year Treasury note yield, which is now 1.5%,1 pushing up through 2% and perhaps even approaching 2.5% in 2022 if inflation remains high. Such a rise in yields would put downward pressure on most bond prices which is why we advise keeping maturities shorter. Overall, we don’t see meaningful returns from fixed income investments in 2022 with yields so low. Income hungry investors will likely have to look elsewhere to generate cash flow from their investments. We will discuss this in the next section.


Asset Allocation

We continue to believe a diversified portfolio of high-quality stocks will outperform bonds and cash type investments over the next 3-5 years. Currently, high grade corporate bonds with an average maturity around ten years are yielding about 2.3% using the iShares IBoxx Investment Grade Corp Bond ETF (LQD) as a benchmark. A portfolio of dividend paying stocks is currently paying an average dividend yield of between 1.5% and 3% depending on the type of stocks used in the portfolio. That compares very favorable to the average yield on corporate bonds. However, unlike bonds, dividend stocks have the potential for the yield to rise over time as the earnings of the underlying companies increase and they in turn boost dividend payments. Of course, dividends could also fall if earning decline.

Historically, earnings on the S&P 500 have risen on average about 7% per year dating back to 1926.19 Add to that percent increase an average dividend yield of 2% and you get a very respectable 9% average annual return. That total return calculation is supported by history. According to the chart below, the average annual rate of return for the S&P 500 index for the 70-year period ending December 31, 2019 was 11.2%. However, the negative to investing in stocks is the investor must endure market volatility and other risks of stock ownership. There can be substantial drawdowns in the portfolio value from time to time especially on a one-year basis as you can see on the chart. When you lengthen the holding period for stocks to five, 10 and 20 years, the potential downside risk falls substantially.

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Source: Barclays, Bloomberg, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibbotson, J.P. Morgan Asset Management Guide to the Markets. Returns shown are based on calendar year returns from 1950 to 2019. Stocks represent the S&P 500 Shiller Composite and Bonds represent Strategas/Ibbotson for periods from 1950 to 2010 and Bloomberg Barclays Aggregate thereafter. Growth of $100,000 is based on annual average total returns from 1950 to 2019.– U.S. Data are as of September 30, 2020.

Given the current economic environment, we believe the advantage of owning stocks is even greater than in the past given the level of interest rates and the potential for rising inflation. But again, one must be able to tolerate the principal volatility and occasional bear market in stocks when the stock market falls 20% or more. On average, the S&P 500 Index has suffered 26 bear declines of 20% or more going back to 1928 with an average decline of 36%.20

In every case, these bear markets were followed by bull markets where the losses were recovered.20 Although we don’t see a bear market any time in the near future, investors must always be prepared. The best way to prepare in our view is to have an asset allocation strategy that can help reduce downside volatility to a level that is appropriate for the investor. Some investors believe they can predict the onset of a bear market and get out of stocks before it occurs.

You can turn on CNBC and get all kinds of advice about when to get in and get of the stock market. From our experience, this type of market timing does not work in the long run. In our nearly 40 years of investment experience, we have yet to find anyone who has consistently been able to time major market movements. We feel strongly that trying to time the onset of a bear market is futile and typically ends up hurting portfolio returns. Since the stock market is rising about 80% of the time, it makes more sense to us to build a solid portfolio that is designed to withstand the ups and downs of the economy and the stock market and simply stay the course.

While we still favor an allocation to equities, with the S&P 500 Index at all-time highs, bargains in the stock market are much harder to find. One of our jobs is to find those bargains. In the currently environment, we feel one must be very selective in building an equity portfolio in order to achieve favorable portfolio returns. We see value in several areas of the stock market. In particular, we think sectors and stocks that are more sensitive to overall economic growth have good upside potential. These types of stocks have generally underperformed over the past few years as investors tended to migrate more toward growth stocks that are less economically sensitive. Technology and consumer discretionary stocks generally fall into the growth category as companies in these sectors are less vulnerable to the ups and downs of the economy. We continue to favor this growth sector as companies continue to invest in new technology to help make their business more competitive.

On the other hand, sectors like energy, financials, industrials, and materials have underperformed particularly since last summer when the Delta variant caused an economic slowdown. Stocks in these sectors were starting to recover in the fourth quarter when the Omicron variant emerged, stoking fears of another economic slowdown and sending these stocks downward once again. We feel these economically sensitive sectors are bargains and have a lot of room on the upside as the economy recovers from what we believe will be a temporary Covid induced slowdown.

We particularly like the energy sector. After years of under investment in our nation’s energy infrastructure, we now find ourselves with potential supply constraints for fossil fuels. Currently, according to the U.S. Energy Information Administration (EIA), nearly 80% of our nation’s energy needs come from crude oil, natural gas, and coal.21 However, over the past few years, environmental groups and government regulatory actions have pressured energy companies to reduce their carbon footprint by curtailing capital investments for energy production activities. These factors, along with the global coronavirus pandemic which has depressed demand for energy, have led to a reduction of the amount of fossil fuels produced in the U.S. According to the EIA, in 2019 the U.S. crude oil production peaked at 13 million barrels per day and averaged 12.29 million barrels per day for the year.22 Average daily production declined to 11.28 million in 2020 and is estimated to average 11.18 million in 2021.22 U.S. oil production is set to rise in 2022 as high oil prices are attracting more drilling activity. But we believe global demand for energy products will continue to recover while supplies will remain tight which could potentially drive crude oil prices higher. Currently, the West Texas Intermediate (WTI) crude oil price is trading at about $79 per barrel.1 We believe WTI will trade between $70 and $85 per barrel in 2022. There are some energy analysts who are forecasting that oil prices could break through $100 per barrel in 2022. Goldman Sachs is predicting high demand for oil in 2022 and that oil at $100 was a possibility.23 In our price range scenario, we believe energy companies can be very profitable in 2022. In our view, this makes energy related stocks very attractive. We particularly like the big integrated oil stocks as well as the mid-stream pipeline sector. We feel many stocks in these sectors have strong balance sheets, favorable earnings growth potential and good dividend yields. But investors need to be careful about high dividend yielding energy stocks that could have too much debt on the balance sheet. Too much debt can be a killer in a market downturn.

In terms of asset classes, we still favor U.S. large capitalization (Large Cap) stocks. U.S. Large Cap stocks were the best performing asset class of all of the major asset classes for 2021 as of November 30, 2021 as you can see in the accompanying chart. We believe one of the primary reasons for this outperformance rests in the fact that the U.S. has been and will likely continue to be stronger and more resilient than other economies around the world.

Sources: Bloomberg, ©Morningstar. All Rights Reserved.(i), and Wells Fargo Investment Institute. Total return as of November 30, 2021. YTD=year-to-date. Index return information is provided for illustrative purposes only. Performance results for the Moderate Growth & Income Liquid (3AG) Portfolio are hypothetical. Index returns do not represent investment performance or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other distributions and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment. Unlike most asset class indices, HFR Index returns reflect deduction for fees. Because the HFR indices are calculated based on information that is voluntarily provided actual returns may be higher or lower. than those reported. Hypothetical and past performance does not guarantee future results. Composition of the Moderate Growth & Income Liquid (3AG) Portfolio, the asset class risks associated with the representative asset classes and the definitions of the indices are provided at the end of the presentation.

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In our view, the U.S. has generally suffered less from the pandemic because we have been less restrictive on the activities of businesses and consumers. Like the rest of the world, the U.S economy went into lockdown mode in March 2020. But in May, President Trump, realizing that continued lockdowns could potentially have a disastrous impact on the U.S economy, encouraged states to relax lockdown measures and begin the process of reopening their economies. Many state governors agreed and slowly began allowing businesses to reopen which we believe helped lead to a strong rebound in economic growth in the third and fourth quarters of 2020.

However, most of Europe, China, Japan, Canada, Australia and other countries continued to enforce very restrictive coronavirus protective measures for 2020 and into 2021. Even to this day, many of these countries maintain tight restrictions on business and consumer activity. As a result, these counties are struggling to regain economic growth. To be expected, the stock markets of these countries as a whole have underperformed the U.S. markets as indicated in the chart which shows the Developed ex-U.S Equity index with a rate of return of only 6.3%.

We have continued to favor U.S. Large Cap stocks over the past few years. Moving into 2022, while we still like the large cap sector we see value in Small Cap stocks. This asset class underperformed Large Caps in 2021 as shown on the chart. We believe Small Caps could see strong performance for the next few years as they benefit from the continued improvement in U.S. economic growth. Many smaller companies have been hurt by the pandemic and the global supply chain issues which may account for their underperformance verses the Large Cap sector in 2021. We feel the global supply chain bottleneck will improve in 2022 which could positively impact smaller companies. If the U.S. economy performs as we expect, we believe these stocks could have a very good year.

We have favored Emerging Market (EM) stocks for the past few years. Unfortunately, these stocks did not perform well in 2021. We believe this was due primarily to the coronavirus restrictions put in place by many of these countries to reduce the spread of the disease. The coronavirus restricted consumer and business activity and added to the supply chain problems that hampered global trade which hurt the economies of many EM countries. We still like the EM sector and continue to hold an allocation to it in our diversified portfolios. We see EM stocks on the whole as undervalued when factoring in current earnings as well as future earnings growth potential. We particularly like EM countries in Asia where we think economic growth will be very strong once the pandemic finally subsides. Nearly two-thirds of the world’s population lives in emerging countries. We see strong economic growth in many of these countries fueled by manufacturing, exports, and consumer spending. We believe this presents tremendous upside opportunity for EM stocks. However, we think we will need to be patient because it may take some time for these countries to regain economic growth.

We are less positive on Developed Country international stocks in Europe, Japan, and Australia. We feel these economies are going to take years to recover from their pandemic induced recessions. Their economies were somewhat stagnant even before the coronavirus pandemic due to high debt levels and socialist economic policies. During the pandemic, these countries created even more debt and implemented massive social spending programs that in our view will be very difficult to reverse. However, we believe there are selected opportunities for companies domiciled in these countries that have demonstrated the ability to grow their business in spite of economic difficulties. Like our Emerging Markets allocation, we use professionally managed funds to identify opportunities in Developed Country stocks.

The Bottom Line

In summary, we see the potential for a strong recovery for the U.S. economy as we move past the winter months and the current surge of coronavirus cases. Although the Fed has begun to withdrawal the pandemic induced liquidity support for the economy, we believe monetary policy will still be very supportive of economic growth and equity markets. We see gridlock in Washington in 2022 preventing any major legislation that could potentially hurt the economy. Although the 2022 mid-term elections may cause some volatility in the stock market this year, we believe the election will result in continued gridlock for the rest of the Biden presidency.

Although we are optimistic about the U.S. economy and financial markets for 2022, we understand there are risks to our forecast as we have outlined above. We believe diversification will be very important in navigating through what is likely to be another volatile year for the financial markets. The beginning of the year is a good time to evaluate your current asset allocation to ensure your portfolio is in line with your long-term goals and objectives. This could also be a good time to rebalance portfolios back to long-term target allocations.

Lastly, Trinity Capital Management celebrated its 10-year anniversary in October. We continue to grow our business and add financial advisors and staff. In July, Buchanan Wealth Management from Nacogdoches headed up by Wendy Buchanan, affiliated with our firm. In December, Staci Madsen joined our Tyler office as an administrative assistant. In January of this year, Jason Grigsby joined our team as a financial advisor from a local bank. These additions bring our total assets under management to over $1 billion as of December 31, 2021, a milestone we have strived to achieve since we formed Trinity Capital Management ten years ago. We are excited about our growth and about the future for TCM. However, we couldn’t have done this without our clients who have supported us over the years. We thank you for your confidence and trust you have placed in us. We are honored to serve you and your families.

May you and your families have a very Happy and Prosperous New Year!

TheTrinityCapitalManagementTeam


Trinity Capital Management, 821 ESE Loop 323, Suite 100, Tyler, Texas 75701. 903-747-3960. www.tcmtx.com

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC, a registered broker-dealer and separate non-bank affiliate of Wells Fargo and Company. Trinity Capital Management, LLC is separate entity from WFAFN.


Footnotes

1Wells Fargo Investment Institute, 2022 Outlook December 2021

2https://coronavirus.jhu.edu/

3https://www.cdc.gov/media/releases/2021/s1227-isolation-quarantine-guidance.html

4 NPR.org, “New Antiviral Drug Are coming For Covid.” November 30, 2021

5 FDA.gov, Coronavirus Update: FDA Authorizes Additional Oral Antiviral Treatment of Covid-19 in Certain Adults. December 23, 2021

6https://www.investopedia.com

7https://www.spglobal.com “Global Corporate Capex Poised for Biggest Surge Since 2007” August 2, 2021

8https://www.federalreserve.gov/releases/z1/dataviz/z1/balance_sheet/chart/

9 Forbes, “December 2021 FOMC Meeting: Fed Quickens the Taper as Inflation Concerns Grow.” December 15, 2021

10https://www.newyorkfed.org/markets/reference-rates/effr

11 Thompson charts

12 Wells Fargo Investment Institute, State of the Markets: 2021 – The year that wasn’t

13  https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm

14Market Watch, “If Inflation is More Than Transitory, Consumer Prices and Stocks Could Both Keep Climbing” By Mark Hulbert, November 13, 2021

15 Seeking Alpha, “S&P 500 Earnings Update” June 6, 2020

16 Macrotrends.com, S&P 500 PE Ratio – 90 Year Historical Chart https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart

17 CNBC, “Big Wealth Investors Are Likely to Put Money to Work in Stocks After Amassing Record Levels of Cash” December 16, 2021

18 Wells Fargo Advisory Services, “Capital Market Index Returns through December 31, 2021

19 “Stocks for the Long Run” by Professor Jeremy Siegel

20 Hartford Group, “10 Things You Should Know About Bear Markets.” https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/CCWP045.pdf

21https://www.eia.gov/energyexplained/us-energy-facts/

22 CNBC, “U.S. Oil Production Set to Increase Further in 2022” December 29, 2021

23 CNBC.com, Goldman Says Oil Could Hit $100…” December 17, 2021


The indices presented in this material are to provide you with an understanding of their historic performance and are not presented to illustrate the performance of any security. Investors cannot directly purchase any index.

Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.

The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

Wells Fargo Advisors Financial Network is not a legal or tax advisor. Consult your tax advisor or accountant for more details regarding your specific circumstance.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income securities may be worth less than the original cost upon redemption or maturity. Yields and market value will fluctuate so that your investment, if sold prior to maturity, may be worth more or less than its original cost. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns nor can diversification guarantee profits in a declining market. Diversification does not guarantee profit or protect against loss in declining markets.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank,

N.A. is a bank affiliate of Wells Fargo & Company.

Investment Grade Securitized: Bloomberg Barclays Mortgage Backed Securities Index; Developed Market ex U.S: JPMorgan Global ex-U.S. Government Bond Index; U.S. Treasuries: Bloomberg Barclays Global U.S. Treasury Index; U.S. Municipals: Bloomberg Barclays U.S. Municipal Index; U.S. TIPS: Bloomberg Barclays

U.S. TIPS Index; U.S. Corporates: Bloomberg Barclays U.S. Aggregate Corporate Bond Index; U.S. High Yield: Bloomberg Barclays U.S. Corporate High Yield Index; Emerging Market: JPMorgan Emerging Markets Bond Index. Index return information is provided for illustrative purposes only. Index returns do not represent investment performance or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other distributions and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment.

S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the Index proportionate to its market value.

Dow Jones Industrial Average: The Dow Jones Industrial Average is an unweighted index of 30 "blue-chip" industrial U.S. stocks.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

  • The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions.
  • Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet- related stocks smaller, less-seasoned companies, tend to be more volatile than the overall market.
  • Risks associated with investment in the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment.
  • Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector.
  • There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance.
  • Materials industries can be significantly affected by the volatility of commodity prices, the exchange rate between foreign currency and the dollar, export/import concerns, worldwide competition, procurement and manufacturing and cost containment issues.

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

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Investment and Insurance Products Are:
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Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested

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